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From the use of hydraulic semaphores in the First Punic War to the advent of 5G networks, innovation around telecommunication technology has always been heavily asset reliant. As technology continues to advance, the intensity of capital investment in telecommunication networks show no signs of slowing. More recently, the establishment of virtual operators who offer B2C and B2B services leveraging the physical networks of fixed line operators and tower infrastructure businesses, has resulted in a continually evolving practice of network sharing arrangements between those in the sector.
Whilst the sector has been grappling with the complexities associated with the accounting for such arrangements for many years now, the continued evolution of both network sharing practices and accounting standards, means that companies will need to periodically re-assess the applicability of their financial reporting practices.
At the Deloitte Telecom Finance Forum, September 2020, we discussed some of the key judgements associated with the accounting for fibre that continue to cause divergence in practice between operators in the sector, with continued diversity in practice still apparent.
A good example of this relates to the diversity in classification of the ‘last mile’ as a lease (or not). We note that this classification judgment appears to be driven by: (i) the different circumstances from which telecommunication operators access, utilise and benefit from ‘last mile’ arrangements; and (ii) the resulting judgment on whether the operator considers that it can control the ‘last mile’ of the network, in accordance with IFRS 16 Leases.
In addition, despite the fact that the International Accounting Standards Board (IASB) included the distinction between capacity portions and dedicated fibre pairs in its illustrative examples to IFRS 16, from the conversations held, it does not appear that operators are regularly accounting for sharing arrangements such as leases. At a glance, this appears to be due to most operators having ‘true’ capacity sharing arrangements (as envisaged by IFRS 16), as opposed to a right to use specific fibre pairs / wavelengths.
Though most entities have now reported under IFRS 16, with key judgements on classifications now made, application of the guidance continues to be challenging for complexities seen in the sector. As such, the clarity of disclosures over key judgements in this area remain as important as ever.
If you are interested in hearing more about topical Telecoms issues, with a focus on accounting and finance, you can sign up to future telecoms finance forums by emailing firstname.lastname@example.org.
Tom is a Director in our Assurance practice, sitting within the Accounting Advisory team. Tom has a detailed knowledge of IFRS and UKGAAP, with specific expertise in revenue recognition, lease accounting and business combinations, and has supported clients in the telecoms sector for the past six years. Alongside Mark Tolley (UK TMT Audit and Assurance Leader) and Jim Brown (UK TMT Assurance Leader) Tom sits on the A&A telecoms leadership team, working on a number of key client accounts as well as driving the external thought leadership group, the Deloitte Telecom Finance Forum.